Easier overseas listing

Move will remove a major bottleneck for start-ups, MSMEs

The Ministry of Corporate Affairs is reported to be finalising the rules for Indian companies to list overseas. Seven nations — the US, the UK, South Korea, Japan, France, Germany, and Canada, all of which have high standards of financial regulation — will be put on a permitted list, and Indian companies can list either by issuing fresh shares, or by selling existing shares. The International Financial Services Centres Authority’s (IFSCA’s) Gujarat International Finance Tec (GIFT) City will also be treated like an overseas jurisdiction in this regard. These companies will not be required to have a secondary India listing. Moreover, the eligibility criteria in terms of profitability, net worth, paid-up capital, turnover, and so on will be relaxed to allow start-ups to avail themselves of this option. However, any company with negative net worth will not be allowed to list overseas. The eligibility thresholds will be further reduced if a company wishes to list in IFSC GIFT, in order to promote the Smart City option.

The decision to relax norms to allow start-ups and micro, small, and medium enterprises to list abroad should have several positive consequences. It allows start-ups that need capital to access alternative sources, and gives entities such as Reliance Industry’s subsidiary Jio Platforms, which has raised over $20 billion, a chance to “internationalise” by listing abroad. It has even been suggested that the government could sell stake in the Life Insurance Corporation through this route.

This move could give Chinese investors in Indian unicorns a chance to exit gracefully and would solve a potential diplomatic problem, given the tensions between the two nations. Chinese entities have at least $4 billion invested in around 90 India-based start-ups, including unicorns such as Zomato, BigBasket, and Paytm (all backed by Alibaba), while Tencent is invested in Byju’s, Ola, and Swiggy.

This policy change is consistent with the amendments to the Company Act (2013) made in the last monsoon session of Parliament. It has been on the anvil since late 2018 at the least, when it was proposed at a board meeting of the Securities and Exchanges Board of India. The liberalised listing rules became necessary once the foreign direct investment (FDI) policy was amended in April this year to raise the bar for careful scrutiny of investment from neighbouring countries. That effectively put a stop to investment from China. From then onwards, Indian start-ups have been starved of capital, with the pandemic making things worse. Since then, Indian firms have attempted to avoid this regulation by incorporating overseas. The ministry’s move considerably eases the legal and regulatory situation, making such convoluted measures unnecessary.

However, there are several caveats here. One is that extremely promising start-ups often have negative net worth, since start-ups can lose money for years. It would still be difficult for them to get overseas listings. A second potential issue is that there could be opportunistic capital raising abroad by fly-by-night operators, who exploit the more relaxed norms. A third area of concern is with regard to the complicated norms and thresholds for FDI in specific sectors. There would have to be a very detailed fine print to this policy change to ensure the FDI thresholds are not breached. Alternatively, the FDI thresholds could be relaxed to further liberalise policy. The devil could be in the detail.